ERC – Too Good to be True?
By: Pete Kennedy, CPA, Director
Have you seen the ads? Received a letter?
By now, most of us have probably heard the radio ads or seen TV ads — “Up to $26,000 per employee”, “quick and easy application process”, “experienced CPAs and Tax Attorneys”, “available even if you got PPP” and, of course, the inevitable “time is running out.” You may have even received a letter advising you that you may have funds that are entitled to compensation for having retained employees during the pandemic. They are referring to the Employee Retention Credit or ERC. The ERC was developed to encourage and support employers (for-profit and nonprofit) who retained existing employees throughout 2020 and for the first three quarters of 2021 by offering a generous payroll tax refund through the IRS.
Warnings are beginning to surface about “ERC mills” and the company sponsoring the ads mentioned above would certainly fall into that category. We have seen one set of filings done by an ERC mill and without even seeing the actual calculations, it is obviously wrong (qualifies the recipient for all 6 quarters without any reference to gross receipts reductions or government order-related impacts, includes owner and owner’s family members’ payroll expense for a for-profit which is not allowed). The filings ignore basic facts about that company and basic facts about the qualification criteria to max out the amount of the claim. The contract with the ERC mill specifies a 25% fee payable as soon as the IRS check arrives.
Unfortunately for many of the authors of the glowing reviews for the ERC mill, receiving a check from the IRS is not the end of the process. As is the case with all tax returns (ERC is filed for by amending the quarterly Form 941 payroll tax return), the IRS has the right to audit. Perhaps anticipating the temptations with this particular program, or being mindful of the industrial scale fraud which occurred with the PPP and enhanced unemployment payments, there is baked into the ERC an extended audit window. They have promised a robust audit program for this credit.
What’s the worst that can happen?
Let’s take a simple example of a for-profit organization that files for a $100,000 ERC. The credit is approved, the business receives $110,000 ($10K interest), and pays out $25K in fees. Three years later, the IRS audits and disallows the ERC in full. The business will need to pay back the original $100K, the original interest of $10K, interest from the date of receipt – let’s say another $10K, and an accuracy penalty of $25K. We’ll assume the fraud penalty will stay in the IRS holster, but they could, in theory, try to assess another $70K there. So $145K due back, after receiving a net $85K which is probably long gone along with those $25K in fees. I’m going to make a not so bold prediction that a significant number of the review writers on the website will be in bankruptcy by the time this process plays out.
We have heard even more disturbing news that “trusted advisors” are referring their clients to these mills in return for a proverbial “piece of the action.” In my opinion, anyone who would refer their client to an organization without any idea of the quality of their work or the risks involved has squandered their “trusted” status for a few quick bucks.
The stance of regulatory agencies so far seems to be caveat emptor. Any noise they may be making (Google “IR 2022-183”) is being drowned out by the roar of “$26K per employee”, “quick easy process”, and “time is running out.”
Don’t be lured by the temptation of “quick, easy money”
We see after-the-fact reports and it is often mystifying in retrospect how anyone could have possibly believed in something that was so obviously “too good to be true.” Well, free, quick, easy money is a powerful lure. In the wake of PPP and the many other programs attendant to the COVID pandemic, this might just seem like another giveaway and FOMO (fear of missing out) takes over. Please don’t be tricked into falling for this yourselves and tell your contacts to apply a healthy dose of skepticism. ERC is a legitimate program, but failure to apply the actual rules of the credit to applicants and their specific situation will result in inflated credit amounts which will, in all likelihood, need to be repaid and inflated contingent fees.
Pete Kennedy is a Director at Cover & Rossiter and is one of the leaders of our Audit practice. He has developed an expertise in nonprofit accounting, auditing and tax issues and is privileged to work with many of the region’s leading institutions.